Tax Reform: “Unintended Consequences”

Tax Reform: “Unintended Consequences”

There’s a lot that’s wrong with the GOP’s tax overhaul, and much of it can be put down to the speed at which it has been flung together, speed that, given the breadth of the proposed changes and the complexity of the tax system, is quite astonishingly reckless. There is absolutely no need to declare ‘victory’ (it’ll be anything but) by Christmas.

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And, yes, while the complexity of the tax system is part of the problem that the GOP has set out to tackle (without, I suspect, much success), that does not mean that it can avoid the uncomfortable reality that simplifying the complex can itself be complex. The Gordian option is not always available.

A week or so back, I quoted something written by the Wall Street Journal’sGreg Ip:

In their rush to pass a sweeping tax overhaul, Republicans and the Trump administration may be headed for a reckoning with the law of unintended consequences. The U.S. tax system is a complex, jury-rigged contraption. At the best of times, tampering with any part invariably triggers collateral consequences. Those risks are magnified now by Republicans’ determination to pass the plan with minimal hearings on party lines by Christmas.

Republicans’ tax-rewrite plans are riddled with bugs, loopholes and other potential problems that could plague lawmakers long after their legislation is signed into law…

Republicans may try to pass subsequent legislation to address problems, but that may not have the ”reconciliation” protections — a set of complex rules in the Senate that allow them to shut off Democratic filibusters — on which they’re now relying to move their plan through the chamber. That would enable Democrats to block any fixes.

In many cases, Republicans are giving taxpayers little time to adjust to sometimes major changes in policy. An entirely new international tax regime, one experts are still trying to parse, would go into effect Jan. 1, only days after lawmakers hope to push the plan through Congress.

“The more you read, the more you go, ‘Holy crap, what’s this?’” said Greg Jenner, a former top tax official in George W. Bush’s Treasury Department. “We will be dealing with unintended consequences for months to come because the bill is moving too fast.”

…Republicans may try to pass subsequent legislation to address problems, but that may not have the ”reconciliation” protections — a set of complex rules in the Senate that allow them to shut off Democratic filibusters — on which they’re now relying to move their plan through the chamber. That would enable Democrats to block any fixes.

Lawmakers could also punt some of the issues to Treasury to figure out with government regulations. But that’s typically a slow process, and most of the Republican plan would take effect Jan. 1.

Some high-income business owners could face marginal tax rates exceeding 100% under the Senate’s tax bill, far beyond the listed rates in the Republican plan. The possible marginal tax rate of more than 100% results from the combination of tax policies designed to provide benefits to businesses and families but then deny them to the richest people. As income climbs and those breaks phase out, each dollar of income faces regular tax rates and a hidden marginal rate on top of that, in the form of vanishing tax breaks

Virtue-signaling (for the benefit of an audience that will not be won over) comes at a price.

Meanwhile, while we should be pleased that the GOP withdrew its earlier plan to attack 401k plans, it appears that the Republican war on savers is not over.

A little-discussed provision in the Senate tax bill could lead to a higher tax bill for millions of small investors and cause many to unload stocks before year-end to avoid those costs.

Under the Senate’s $1.4 trillion tax overhaul, investors would lose the ability to choose which shares they can sell to reduce a position. Instead, investors selling partial stakes in a company would have to unload their oldest shares first, a process known as selling on a “first-in, first-out” basis.

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After complaints, mutual funds and ETFs have been exempted from this particular twist of the Republican knife, but the GOP Senate majority’s message to individual investors is to drop dead or, rather, to pay up. It’s a move that punishes both the buy-and-hold and dollar cost averaging approaches preferred by many smaller investors and is made all the more iniquitous by legislators’ long-standing refusal to inflation-adjust capital gains that, in the real world, may be far less than they seem.

At least House Republicans appear to see that there’s a problem:

The House’s tax proposal doesn’t include the first-in, first-out provision, and some lawmakers are trying to kill it. In a letter to Senate leaders on Thursday, 41 House Republicans urged their colleagues to drop the provision, saying it would amount to “massive, fundamental change that inhibits investor autonomy.”

And

Some money managers and analysts say there has been so little discussion of the Senate provision that investors may be surprised to learn that the new rule could reduce—or even wipe out—what they would save from an income-tax reduction.

“If someone thinks their tax bill is going to get cut next year, some investors may wait until 2018 to sell stocks and then have this huge tax bill” since they will be forced to sell their oldest holdings first, said JJ Kinahan, chief market strategist at TD Ameritrade.

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Another vote-winner! When are the midterms again?

And

Another concern for small investors: The first-in, first-out provision will make it more expensive to perform regular portfolio rebalancing to keep their mix of stocks and bonds constant, since the provision will raise the amount of taxes they pay.

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